Daily Commentary

MarketMinder’s View: The rule in question is the Vickers Rule, enacted in 2011, which sought to “ring fence” banks’ deposit-taking business from the allegedly “risky” investment banking units, thereby protecting retail customers’ assets. Some say that this drives a hole through an important crisis-era reform that lowers risk. But in our view, the Vickers Rule (and its ilk globally) was always a solution seeking a problem, in the sense that the 2008 crisis had nothing to do with investment banking vis a vis retail banking. Furthermore, it isn’t like extending long-term loans underpinned by short-term deposits (banks’ core business and social function) will ever be risk-free. But the rules also led banks to raise added capital and, arguably, restrained credit growth. So now the UK government is set to change them. “Lenders would be given ‘an allowance’ worth up to 10 per cent of their ringfenced assets adjusted for risk to carry out activities that are at present prohibited, as long as these supported ‘the real economy’. They would be allowed to conduct more hedging activity through derivatives inside the entities and share some pension surpluses with other parts of their business. The Bank of England plans to change its rules to allow ringfenced banks to share more essential services such as IT within their businesses, while the central bank is also reviewing their capital requirements.” This looks like an incremental plus for economic growth to us, but we wouldn’t overstate the case. Banks could easily retain excess capital for fear of future regulatory shifts or potential blowback if the economy sours.

MarketMinder’s View: With UK Chancellor of the Exchequer Rachel Reeves set to announce measures aimed at assuaging household fears over inflation and living costs, news is leaking that the government may “ask” some food retailers to cap prices of essentials like fruit, bread and eggs, among others. This is on the heels of the Scottish National Party winning the early May election to control its devolved national parliament after employing harsher-but-similar promises. While the use of such measures here seems limited and unlikely to carry much market or economic effect—if it even becomes policy—it is highly unlikely to work. “One of the retail executives argued the government should focus on reducing ‘cost headwinds’, as a [price] freeze would not ‘deliver the outcome they want’. The source said the plan might depress prices on the 20 or so items covered but this was likely to have ‘unintended consequences on items they might not consider essential but might be for some families’ as businesses sought to recover lost profits elsewhere.” It would likely also reduce supply of essentials, as it artificially boosts demand and reduces the incentive to increase supply accordingly. That is the lesson of the 1970s’ price controls: They don’t actually control anything and do little more than store up inflation for later, when relaxed. Now, perhaps this is just the UK government floating a trial balloon it pulls back quickly. But the use and popularity of measures like this is a risk worth watching, given the zeitgeist around prices worldwide.

MarketMinder’s View: Canada’s headline Consumer Price Index ticked up in April to 2.8% y/y from 2.4%, but beyond gasoline and energy prices, there are few signs inflation poses a credible risk up north: “Energy prices overall rose a whopping 19.2 per cent year-over-year in April, following a 3.9 per cent increase the month before. Statistics Canada said the cost of gasoline specifically rose even quicker, and was 28.6 per cent higher year-over-year, thanks to the supply crunch in the Strait of Hormuz and because of the switch to the more expensive summer blend of gasoline.” As the report goes on to explain, some of that rise is because of oil prices’ climb on the Iran war. But it is also skewed upward in Canada because of base effects. Last April, the government waived an 18 cent-per-liter federal carbon tax. That lowered gasoline prices over the past 12 months, but it fell out of the comparison base now. As Statistics Canada explained, excluding gasoline only—just gas—CPI rose 2.0% y/y, slowing from March’s 2.2%. Canada is yet another nation where inflation measures show the war’s effect on oil prices hasn’t swayed prices beyond fuel at this point—and it likely won’t affect them much, given money supply growth is tepid.